Transcript
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Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asia Economist at HSBC.
Speaker: My regular co-host Harold is on the road right now, but I'm delighted to be joined on today's podcast by Paul Bloxham, our Chief Economist for Global Commodities based in Sydney.
Speaker: We'll be talking commodities across the board today, all in the context of China's recovery, which is getting off the ground slower than many expected.
Speaker: How big a drag is this for global markets?
Speaker: And what's the outlook for commodities from fossil fuels to farming products?
Speaker: Let's start answering some questions under the Banyan tree.
Speaker: Let's begin as usual with a few facts to put today's discussion in context.
Speaker: China is the world's largest consumer of many key commodities, particularly metals.
Speaker: In fact, it imports more than 50% of the world's iron ore, zinc and refined copper and aluminum.
Speaker: And in a lot of cases, Chinese demand growth outstrips the rest of the world combined.
Speaker: And it was thought that a post-COVID recovery in China would spark a commodities upswing.
Speaker: But so far this year, that recovery has failed to match expectations.
Speaker: Let's bring in our chief economist for global commodities, Paul Bloxham, for more.
Speaker: Paul, great to have you with us.
Speaker: Great to be here, Fred.
Speaker: So, Paul, we've seen really disappointing numbers coming out of China.
Speaker: Growth is not really ratcheting up as much as expected at the beginning of the year.
Speaker: That obviously has implications for the regional and global economies, particularly for commodities.
Speaker: Can you give us a sense of how commodity markets fared so far this year and how important is the China story for commodities generally?
Speaker: I think China is still critically important for the commodity story.
Speaker: For a lot of the commodities, particularly the metals, China consumes over half of the world's supply of these products.
Speaker: And you're spot on.
Speaker: This is certainly a key driving force in the commodity space.
Speaker: If you look at the overall commodity story, commodity prices have been coming down.
Speaker: They're still very high, well above average, but they've been coming down.
Speaker: And one of the contributing factors, of course, has been that we've had disappointing data in China, that the Chinese growth story has been slowing down.
Speaker: Now, let's unpack this a little bit.
Speaker: There are obviously different classes of commodities.
Speaker: Let's start with energy.
Speaker: There was a great hope that really the Chinese recovery will lead into more travel demand, for example.
Speaker: But has that been reflected in energy prices?
Speaker: There seem to be softening of late.
Speaker: Well, so one of the primary stories for the energy space, of course, has been that big supply constraint we had from the Russia-Ukraine war.
Speaker: A lot of that effect has been fading and that's been freeing up the supply side in terms of the energy products.
Speaker: And as you say, the hope has been that one of the things that would support energy products would be a reopening of China and more demand.
Speaker: You have seen a pickup in demand in China for oil.
Speaker: It's been continuing to climb and you have seen that energy story playing out.
Speaker: But it's not as strong in terms of lifting the prices as might have been expected.
Speaker: And then, of course, the fact that China is now losing more momentum
Speaker: I think that's adding to a bit more downside risk to these energy products.
Speaker: I think it's the one area where we still might see, because China's reopening is services oriented, it is consumer oriented, we still might see a bit of support, more so than metals potentially.
Speaker: But it's certainly at this stage, at least, as you say, the loss of Chinese growth momentum is weighing to a degree on the energy price story.
Speaker: Now, on energy in particular, we, of course, have the oil story, lower oil prices.
Speaker: But what about coal and gas?
Speaker: Because we have seen energy shortages going to summers in China in previous years because of growing cooling demand as temperatures rise, etc.
Speaker: Have we seen any kind of pickup in demand on the coal side, perhaps, or even the natural gas side out of China?
Speaker: Well, one of the critical features, of course, for these two products has been that we've seen more supply becoming available, partly because we've gotten through the disruption of the Russia-Ukraine event.
Speaker: On the demand side, it is true that China has needed more of these products, as you say, through last year.
Speaker: They switched to using more coal rather than gas because gas had gone up in price so substantially.
Speaker: I think what we're seeing more broadly now, though, is with a slowdown in the industrial sector, less demand for goods from offshore, less the housing story and the infrastructure story playing less of a role in terms of driving growth as well.
Speaker: There's just a general weaker demand for energy for energy in that sense on the oil front.
Speaker: or oil demand has actually been picking up.
Speaker: And I think that relates to the transport story we're seeing and going on in an ongoing sense in China as we are seeing some revival of the services sector.
Speaker: Now, the other second class of really broad-based class of commodities, of course, metals.
Speaker: And here, China dominates the global demand, particularly iron ore, for example.
Speaker: A lot of it goes into Chinese housing construction.
Speaker: Now, given that this is such a services-led recovery in China, how is that reflected in the price of metals in particular?
Speaker: The metals prices have been quite weak through the year so far.
Speaker: There's been a little bit of a bounce recently in the last couple of weeks on the back of an expectation that there's going to be a bit more stimulus provided by the authorities in China, sort of getting ahead of that expectation.
Speaker: But look, our core view is we shouldn't really expect that there's going to be a large lever pull and it's not going to be particularly supportive of a large lift in housing or infrastructure investment.
Speaker: So if that's the case, the metals story is still going to remain quite challenged, we think.
Speaker: And that's been the view we've had on the bulk commodities for a little while now.
Speaker: The idea that this is not going to be the main driver of the China growth story.
Speaker: So those areas are not going to be the ones where we see the biggest lift.
Speaker: The bits of the metal story where the story is a bit more positive is all of the green metals associated with the energy transition, because there is still this
Speaker: shift to electric vehicles.
Speaker: And a lot of other countries, of course, are taking action in terms of policy to drive that as well.
Speaker: So that narrower segment of metals is being better supported.
Speaker: But in a broad sense, the China slowdown is not particularly good news for the metals prices.
Speaker: So some good news, I guess, for the energy transition metals, less good news for the metals that go into construction overall in China.
Speaker: Now, when we think about construction, we really have housing and we have infrastructure.
Speaker: There's been some wobbles in the Chinese housing market, but perhaps a bit more resilience on the infrastructure side.
Speaker: Can you give us a sense of how important the relative segments are, housing construction,
Speaker: versus infrastructure belief between, by some estimates, up to a quarter of global steel demand goes into Chinese housing.
Speaker: So surely there, these structural challenges are going to weigh medium term on iron ore prices, shouldn't they?
Speaker: Well, that's right.
Speaker: So the housing story typically is the more metals intensive part of this story.
Speaker: But it does also, of course, depend on the type of infrastructure that's being built.
Speaker: The more the infrastructure is moving away from sort of large scale
Speaker: buildings and dams and these sorts of the less metals intensive it is likely to become.
Speaker: And that's the direction we're headed in terms of the overall China story as well.
Speaker: So without the expectation of a pickup in the housing construction story, I think that adds to the sense that it's going to be the case that these metals are going to be in less demand, that we're not going to see maybe the same sort of lift in prices we've seen in the past when China is set out to try and stimulate growth.
Speaker: Now, another third broad category for commodities, of course, agricultural commodities.
Speaker: And we've seen a lot of headlines about El Nino coming back.
Speaker: We've seen heat waves across Asia, all of which raises fears about rising food prices.
Speaker: First of all, do you see that in global agricultural markets?
Speaker: And secondly, is China a big driver of these global prices as well?
Speaker: So there's been sort of three key factors driving the agricultural story.
Speaker: We had these big disruptions from the pandemic that saw prices rise.
Speaker: We then had the Russia Ukraine event, of course, large enormous producers of many of the agricultural products and of fertilizer as well.
Speaker: And that sort of seats or commodity, these agricultural prices hit new all time highs in some cases.
Speaker: Some of those effects are starting to work through.
Speaker: A lot of the product is now coming out of Ukraine as a consequence of the Black Sea initiative.
Speaker: And so that's brought the prices back down to their sort of pandemic levels.
Speaker: But we're still seeing that these agricultural prices are well above the levels we were at in the pre-pandemic period, which tells us perhaps some of these disruptions are still about.
Speaker: But then, of course, there's also the weather factor that is playing a role, too.
Speaker: We've just entered into El Nino.
Speaker: which is according to the US Bureau at least.
Speaker: And typically that does tend to mean lower yields and higher prices in general.
Speaker: So look, our broad take on this is that we're going to see the agricultural prices which have come off their peaks.
Speaker: We still think they're going to remain at fairly elevated levels.
Speaker: Yes, China plays a role as well, of course.
Speaker: On the demand side in particular, there was a lot of building stocks through the pandemic to maintain supply.
Speaker: So actually, as China's growth slows, but also some of that stock rundown happens, that might put a bit of downward pressure on prices.
Speaker: But I think that the broad sort of story is there's still risk that agricultural food prices stay at elevated levels for some time yet.
Speaker: So the way you describe it is a very mixed picture for commodities at the moment.
Speaker: We have some like oil and iron ore, for example, being more exposed to weaker Chinese growth.
Speaker: But we've got the transition metals.
Speaker: We have agriculture, where they have still relatively elevated prices compared at least to the pre-pandemic period.
Speaker: Maybe this is a good time to take a quick break.
Speaker: And when we come back, we can discuss some of the longer term drivers of commodity
Speaker: prices.
Speaker: And I'll be asking Paul whether he still sees a super cycle in commodities around the corner.
Speaker: So Paul, one area where I wanted to pick up the discussion was this idea of a super cycle.
Speaker: We've had super cycles in the past, partly driven by China's enormous appetite for commodities that has started to cool at the margin.
Speaker: Where do you think we are when it comes to the super cycles?
Speaker: Might we see another super cycle in the coming years?
Speaker: That's not been our view and that has differed from others on the street, I might add.
Speaker: You know, we haven't been thinking that this looks the same as previous super cycles.
Speaker: Our view has been that
Speaker: Previous super cycles have almost always been driven by the demand side.
Speaker: It's been a pickup in demand shortage relative to that demand that drives the prices higher and then motivates a very big investment upswing.
Speaker: And of course, that was quintessential of the early 2000 super cycle that was driven by China entering the world, needing a lot of commodities.
Speaker: And it was a broad based positive force that lifted
Speaker: the whole of the global picture, including the emerging economies in Australia, of course.
Speaker: So we don't think it looks like that.
Speaker: We think this time around it's been much, much more that prices have been elevated because of supply constraints.
Speaker: And what we've called it, what we've been calling it is a super squeeze.
Speaker: We've been saying it's supply constraints that have been the primary thing that have been lifting the prices.
Speaker: And now, as you're seeing demand weaken, some of the supply constraints release, you're seeing prices come back down.
Speaker: But we still think there's a sort of core level where prices are not going to fall below.
Speaker: They're still well above at the moment.
Speaker: They're pre-pandemic averages.
Speaker: They're still well above those levels because we are supply constrained.
Speaker: How does that supply constraint come about?
Speaker: One part of it was the Russia-Ukraine conflict, which of course has had an impact.
Speaker: Some of that's fading in terms of its impact on commodities.
Speaker: But the fundamental thing we've looked at is both the weather and also the energy transition.
Speaker: And that being a critical feature, we're just not investing as much globally in capacity to produce oil, gas and coal.
Speaker: We're doing that on purpose.
Speaker: But in leaving those products with less investment, that puts a floor under the extent to which we think prices are going to fall.
Speaker: So we have political uncertainty, we have the energy transition constraining supply relative to demand.
Speaker: Is it also fair to say that the rise in interest rates is maybe reducing at the margin investment, particularly over the near term, given that we have interest rates now globally at levels we haven't really seen in many cases since before the global financial crisis?
Speaker: Well, certainly it's making areas like shale oil production in the US tougher because they rely on a low cost of capital.
Speaker: The cost of capital has gone up.
Speaker: So it changes the economics of that story.
Speaker: So I think that is certainly a factor.
Speaker: You raised geopolitics and that, I think, is also a factor that we'd add into the story when we think about the super squeeze that we've been describing.
Speaker: And of course, I guess there's also another factor we need to keep in mind for commodities, and that is if US interest rates are rising, it tends to strengthen the US dollar.
Speaker: And so typically that would put downward pressure on commodities.
Speaker: But the team, as you would know, expects that the US dollar has peaked and it will start to come down.
Speaker: And that's another factor we need to keep in mind that may very well support the commodity prices at a more elevated level too.
Speaker: So what does this all mean for emerging markets?
Speaker: Over the last 10 to 15 years, we've seen China's rapacious demand for commodities driving up prices and benefiting many of the emerging markets that are major commodity exporters.
Speaker: They received
Speaker: more revenue, they receive more dollar inflow, and as a result, that helped to drive their economies.
Speaker: Now, if we go into a world of a super squeeze as you turn it, with prices more going sideways because overall demand in China is structurally not growing as fast, would that be a negative for emerging markets in general?
Speaker: What do you think?
Speaker: Well, it's not going to be as broad based a positive story as we saw in the early 2000 super cycle, for example, where it was Chinese demand driving prices higher, motivating investment across the board in all sorts of commodities.
Speaker: And that was a very big positive story for the emerging economies as a group.
Speaker: I think it's going to be much more selective.
Speaker: because it means we're not going to do as much investment in some of the areas.
Speaker: The fossil fuels are going to get less investment.
Speaker: There's less large scale oil, gas and coal investment going on.
Speaker: And that's not going to be as broad based a story.
Speaker: That's not to say that there won't be some areas in some countries that obviously benefit
Speaker: from what's going on.
Speaker: And one of the areas is going to be the energy transition, of course, the demand, the strong demand there is for the green metals.
Speaker: And so you can pick out countries that have got those products and are doing a good job of finding ways to invest in them and then benefit from that story.
Speaker: And, you know, for example, Indonesia is one where nickel is a very positive story at the moment in terms of the demand story, you know, from China, but also that super squeeze idea and the idea that the energy transition is driving things is something that's quite supportive for that country.
Speaker: As I say, it's going to be more selective.
Speaker: Copper producers do better out of higher prices, but then they've got to find a way to bring on more capacity.
Speaker: And some of the copper producers are doing a better job of that than others in Latin America, for example.
Speaker: The agricultural prices being higher is something that is benefiting some of the Latin American agricultural producers, for example, because of that squeeze.
Speaker: So it's more selective, I think, than just a broad-based story like we saw in the previous super cycle in the early 2000s.
Speaker: And that's a very good place to stop.
Speaker: We've seen really a much more nuanced story around commodities.
Speaker: Yes, they've sold off a little bit across the board in recent months, but it's a selective story, as you say.
Speaker: Some commodities benefiting from current trends, others being more challenged, and that's also being true for individual emerging markets.
Speaker: Thank you, Paul, for the update and connecting the commodity story to really demand growth in China or lack thereof at the moment.
Speaker: I'm sure we're going to check back in with you in the coming months just to see how the story unfolds.
Speaker: So thank you very much for joining us, Paul.
Speaker: Thank you.
Speaker: And that brings us to the end of another episode, ladies and gentlemen.
Speaker: Thanks as always for listening.
Speaker: And do be sure to check out our other podcasts, the Macro Brief and the ESG Brief, both available on the HSBC Global Research website, or you can search for them on Apple Podcasts and Spotify.
Speaker: We'll be back again next week, putting Asian markets and economics in context.
Speaker: Talk to you then.
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